Investing in rental property developments is an attractive opportunity for generating income and building wealth over the long term. However, many investors, especially those based internationally, may not fully understand the tax implications and how to maximise deductions related to their UK rental property.
For investors seeking to optimise their tax savings and overall profits, properly tracking and reporting eligible expenses is critical. In fact, of the 2.82 million UK landlords that declared income from renting property in the 2021/2022 year, 89% claimed some form of expenses.
This guide outlines 12 deductible rental income expenses allowed in the UK, grouping them into distinct categories, like insurance expenses, furnishing expenses, and more. But first, we’ll start with a rundown of the UK property tax system.
How Does UK Property Tax Work?
Being a property owner in the UK comes with a number of tax obligations. Rental income, for example, is taxable under the UK Income Tax. The tax rate applicable depends on whether the investor is a resident or non-resident landlord.
UK resident landlords are taxed based on their Income Tax rate, while non-resident landlords are typically taxed at a flat rate of 20%. However, non-residents may qualify for the UK tax-free Personal Allowance of £12,570.
In addition to income tax, there are other taxation elements involved. The Stamp Duty Land Tax (SDLT) applies following the purchase of a property above a certain price. Council Tax, a local tax, also applies to domestic property owners.
However, the good news is that there are often landlord tax breaks, and property owners can reduce their tax bill by deducting allowable expenses from their rental income before it’s taxed.
The 12 important allowable expenses on rental income that are tax deductible in the UK are:
- Furniture costs
- Appliances cost
- Amenities cost
- Repairs and maintenance
- Management and administration
- Mortgage interest
- Property taxes
- Operating expenses
- Building insurance
- Contents insurance
- Public liability insurance
- Additional insurance, e.g., loss of rent insurance
Continue reading for more insights into these deductibles.
3 Allowable Expenses for Furnishing a Rental Property
Rental property owners buying a second home to use as a buy-to-let can deduct a variety of expenses related to furnishing and maintaining their investment property. Allowable expenses include furniture, appliances, and other amenities costs.
1. Furniture
Owners can deduct the full cost of furniture purchased specifically for a rental unit. This includes beds, dressers, tables, chairs, couches, and decor. However, if the furniture was used previously in the owner’s primary residence, only a portion of the cost may be deducted. The deduction is based on the remaining useful life of the furniture.
2. Appliances
Major appliances installed in the rental property, such as stoves, refrigerators, washers, and air conditioners, can be fully deducted. Smaller appliances like microwave ovens, coffee makers, and vacuum cleaners also qualify if provided for tenant use. Installation and delivery fees for appliances may be included in the deduction.
3. Amenities
Owners may provide amenities to improve the rental experience for tenants and increase property value. Costs like internet service, cable TV, gym equipment, pool maintenance, and landscaping can potentially be written off as rental expenses. However, there are limits to the deductions for amenities, especially those that benefit the owner; owners should work with their wealth manager or property advisor to determine what qualifies for a deduction.
In summary, furnishing a rental property in proper working condition allows owners to provide good service to tenants, uphold the value of the investment, and are tax deductible. Another landlord tax deduction that can be claimed is maintenance cost, as we will see in the next section.
Managing and Maintaining the Property: 2 Deductible Costs
Managing and maintaining a rental property requires ongoing expenses to keep the investment operational and income-generating. As a landlord building a property portfolio, necessary costs incurred while managing the property are tax-deductible. These can include repairs and management.
4. Repairs and Maintenance
Expenses for repairs, maintenance, and property improvements are tax-deductible. This includes costs for materials, supplies, and services to fix damage or make necessary upgrades.
For example, deductible expenses may include:
- Plumbing or electrical repairs
- Painting or flooring replacement
- Garden or outdoor area maintenance
- Safety equipment installation like fire alarms
Routine maintenance helps ensure the property remains habitable and continues providing rental income. Investors should remember to keep detailed records of all repair and maintenance costs for tax reporting.
5. Management and Administration
The costs involved in managing the day-to-day operations of a rental property are also tax-deductible, and may include:
- Travel to and from the property for inspections, maintenance, or showings. It’s important to track mileage and any public transit fares.
- Office supplies for managing the property, like printer ink, paper, pens, and files.
- Accounting and bookkeeping fees for tracking income, expenses, and tax reporting.
- Legal fees for creating or updating leases, handling disputes, or other rental issues.
- Advertising or marketing costs for finding new tenants. This includes website fees, signage, and listings.
- Property management fees if using a third-party lettings company or manager.
Keeping the property occupied and operating effectively requires ongoing administrative duties. Deducting these necessary management costs can help reduce taxable rental income for landlords. However, proper record-keeping and documentation for all deductible expenses is essential.
With careful expense tracking and tax planning, landlords can maximise deductions to increase cash flow and investment returns from their rental property. Another form of landlord-allowable expenses is financial costs, which we’ll explore in the next section.
3 Financial Costs Landlords Can Deduct From Rental Income
Financial costs directly related to a rental property are typically tax deductible. These finance costs can include mortgage interest, local property taxes, and operating expenses.
6. Mortgage Interest
The interest paid on a mortgage for a rental property can be deducted from rental income. This includes interest paid on loans used to finance the purchase, construction, or renovation of a rental property.
7. Property Taxes
Local property taxes assessed on a rental property are tax deductible. Property tax payments include county and municipal property taxes. Property taxes are deductible in the year they are paid.
8. Operating Expenses
The costs to operate and maintain a rental property are tax deductible, including utilities, insurance, cleaning and lawn care services. Depreciation, or the decrease in value of the rental property over time due to wear and tear, can also be deducted. Depreciation is calculated over 27.5 years for residential real estate.
By properly deducting all eligible expenses for rental property, landlords may significantly reduce the tax liability on rental income. Property investors should keep detailed records of all financial costs related to their rental properties to help maximise tax deductions and comply with regulations. Consulting a tax accountant, wealth manager, or property investment advisor can help determine exactly which costs qualify as tax-deductible for a given rental property.
The last deductible expense we’ll be considering is landlord insurance, which can be of various forms. We’ll look into 4 major ones in the following section.
4 Tax Deductions for Landlord Insurance
According to UK tax law, the HM Revenue and Customs (HMRC) permits landlords to deduct the cost of insurance premiums paid for rental property. This includes policies such as building insurance, contents insurance, public liability insurance, etc.
9. Building Insurance
Building insurance protects the physical structure of the rental property and covers expenses in the event of damage from events like fires, floods, or storms. The premiums paid for building insurance on rental property qualify as a tax-deductible expense.
10. Contents Insurance
For furnished rental properties, contents insurance protects items provided in the property, like furniture, appliances, decor, and other furnishings. The premiums for contents insurance are also tax deductible as a business expense.
11. Public Liability Insurance
Public liability insurance protects landlords in the event a tenant or guest suffers an injury while on the rental property. The premiums paid for public liability insurance are tax deductible and are a great way for UK property owners to maximise rental income.
12. Additional Insurance
Other insurance premiums that qualify as tax-deductible expenses include loss of rent insurance, which covers lost income if the property becomes uninhabitable, and eviction insurance, which covers legal costs associated with evicting non-paying tenants. Always check with the insurance provider to confirm if the premiums paid qualify as a tax-deductible expense before deducting them.
Landlords aimed at maximising rental income and reducing tax liability should be sure to deduct the cost of all insurance premiums and rental expenses allowable when filing their annual tax return. Keeping detailed records of payments made for insurance and other expenses is essential for properly filing taxes on rental income.
The next section provides important tips on how landlords can maximise their capital allowances.
2 Strategies for Maximising Capital Allowances
Capital allowances refer to tax relief on certain capital expenditures, allowing investors to deduct costs from taxable income. Maximising these allowances can significantly reduce an investor’s tax burden. This is achievable via strategic investments and accurate record-keeping.
1. Strategic Investments and Purchase
Strategic investments in buildings, plants, and machinery (appliances) can maximise capital allowances. Investors should time major purchases and repairs to coincide with the tax year in which allowances will have the biggest impact. For example, spending more in a year when taxable income is higher allows for greater deductions. Investors may spread costs over 2 years to maximise benefits.
Also, purchasing assets just before the end of the tax year allows investors to claim capital allowances sooner. However, investors must ensure the assets are ready to let as a rental property. Similarly, purchasing high-value assets one year and lower-value assets the next may maximise benefits across tax years.
2. Detailed Record Keeping
Accurate record-keeping is essential for maximising capital allowance claims. Investors must create a rental accounts ledger to track all invoices, receipts, and other documents proving costs for at least 12 months (records must be kept throughout the property ownership period if planning to deduct expenses from capital gains tax).
Records should include purchase dates, descriptions, and costs for all assets. Investors should categorise expenses appropriately as either full capital expenses, allowances for plant and machinery (such as appliances) or capital allowances for integral building features (such as plumbing or wiring).
In summary, strategic planning, detailed record-keeping, and timely major expenditures appropriately are key to maximising capital allowances and making money from property investment. Investors who make the most of available deductions and reliefs can achieve significant tax savings to help maximise their rental property income. Staying up-to-date with the latest rules on capital allowances places landlords in the best position to benefit from tax relief on rental property. When in doubt, consulting with a wealth manager or property investment advisor can always help.
Frequently Asked Questions
What expenses are allowable against rental income?
Allowable expenses on rental income include:
- General maintenance and repairs to the property.
- Utility bills like water rates, council tax, gas, and electricity,
- Insurance costs, such as landlords’ policies for buildings, contents, and public liability.
- The costs of services, including wages for gardeners and cleaners, as well as letting agent fees and management fees.
Can you offset storage costs against rental income?
Yes, investors can offset storage costs against rental income. These rental charges fall under allowable expenses as they meet the “wholly and exclusively” criteria, meaning the costs are incurred solely for the property business. Thus, the cost of renting storage space can be accounted for against an investor’s income in the same way as other allowable expenses, reducing the overall taxable income from the rental property.
Investors should always remember to keep a record of these expenses to facilitate their tax calculations.
Can I claim a new kitchen on a rental property?
Yes, investors can claim a new kitchen on a rental property, but it depends on the specifics. If the new kitchen maintains the same standard and layout as the old one, the cost can be claimed against rental income.
However, in a case where an investor installs a higher-spec kitchen with better-quality fittings or alters the layout, the cost is considered capital expenditure and is not allowable as a deductible expense. This distinction is crucial for managing tax responsibilities effectively.
Can I claim a new bathroom on a rental property?
Yes, investors can claim the cost of a new bathroom on a rental property. Expenses related to maintenance and repairs, including the replacement of fixtures, are deductible. Fixtures are items that wouldn’t be removed if the property was sold, such as a bath, toilet, boiler, and kitchen units. Therefore, in a case where an investor replaces these items with equivalent ones, the cost is considered an allowable expense that can be deducted from the rental income for tax purposes.
Can I claim a new boiler against rental income?
Yes, investors can potentially claim a new boiler against rental income, but it depends on the circumstances. In a case where an investor replaces a boiler as part of routine maintenance, the cost can be offset as an “allowable expense.” However, it’s important to note that if the replacement of domestic items is covered by insurance, one can’t claim tax relief on it.
Understanding the nuances of allowable expenses is crucial when calculating taxable income from property rentals. Investors can always contact their wealth manager or a property investment advisor when in doubt.
Can a landlord claim for new windows?
Yes, a landlord can claim allowable expenses for new windows under certain conditions. In a case where a landlord is replacing broken windows as part of routine maintenance, these costs are classified as allowable maintenance and repair expenses. However, if a landlord has an insurance policy covering the cost of such repairs, they can only claim expenses on additional repairs not covered by their insurance. This distinction is crucial for accurately calculating taxable income from property rentals.
Conclusion
For property investors seeking to maximise their returns, properly tracking and documenting the rental income expenses allowed to be deducted is key. The tax deductions allowed in the UK for landlords are generous but require meticulous record-keeping and compliance with HMRC rules. Investors must understand what qualifies as an allowable expense and keep detailed records to reduce their liability when it’s time to pay tax. If in doubt or need clarification on what expenses are deductible, investors should consult with their wealth advisor or property investment advisor.
Disclaimer: Any information API Global provides does not constitute financial advice and is for educational purposes only.
